Equity-Market Trading Restrictions and Credit Prices

50 Pages Posted: 30 Oct 2017 Last revised: 27 Feb 2018

See all articles by Mark G. Maffett

Mark G. Maffett

University of Chicago - Booth School of Business

Edward Owens

University of Utah - David Eccles School of Business

Date Written: February 26, 2018

Abstract

We examine how equity-market trading restrictions affect credit prices. Using short-sale constraints (SSCs) as a proxy for trading restrictions, we examine two specific sources of variation — the randomized Regulation SHO experiment and time-series variation in short-selling bans during the 2008 financial crisis. In both analyses, we find that greater SSCs are associated with significantly higher credit-default-swap (CDS) spreads. Changes in the term structure of CDS spreads suggest that this increase is attributable to a decrease in the availability of default-risk-relevant information. Further, using a default-model-prediction framework, we document that it is more difficult to accurately assess default risk when short selling is constrained, which corroborates information risk as a channel through which SSCs lead to higher credit prices.

Keywords: Short-sale constraints, Information risk, Credit prices, CDS spreads

JEL Classification: G15, G33, G38, M41

Suggested Citation

Maffett, Mark G. and Owens, Edward, Equity-Market Trading Restrictions and Credit Prices (February 26, 2018). Available at SSRN: https://ssrn.com/abstract=3060801 or http://dx.doi.org/10.2139/ssrn.3060801

Mark G. Maffett

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Edward Owens (Contact Author)

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States
8015815732 (Phone)

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